A firm offers the optimal mix of wages and benefits.It is paying $5 an hour in wages and $3 in benefits.The minimum wage is then increased from $5.15 to $7 an hour.Assume all workers have the same utility curves (and have the usual shape).If the firm continues to spend $8 an hour on workers,then
A) workers will be better off.
B) workers will be as well off as before.
C) workers will be worse off.
D) it is impossible to determine if workers are better or worse off without knowing if benefits are a normal or inferior good.

Question

Quizplus · Accepted Answer

When the minimum wage is increased and the firm continues to spend the same amount on workers, the firm will have to reduce the benefits provided to workers in order to cover the increased wage cost. Therefore, workers will be worse off since they will now receive less in total compensation (wages + benefits), while the cost to the firm remains the same.

A Firm Offers the Optimal Mix of Wages and Benefits